Connection (CNXN) Q3 2026 earnings review
Connection's hardware sales jump, but rising inventory drains its cash
Connection, a corporate reseller of computers, software and data center hardware, posted record sales while cash flow lagged behind. Net sales jumped 23% from a year ago, easily beating the 7% to 9% growth that chief executive Timothy McGrath had pointed to last quarter. Lower overhead ratios lifted profit per share 28%, even though competitive computer pricing pushed gross margin down.
| Net sales | $874.3M +23.3% from a year ago |
|---|---|
| Gross margin | 18.5% -1.1 percentage points from a year ago |
| Profit per share | $1.24 +28% from a year ago |
| Inventories | $226.6M up from $205.1M last quarter |
⚖️ Verdict: 🟢 Bullish
The story got better because corporate spending finally spread from laptops to data center gear, with server and networking sales surging over 40% after a long slump. One caution: beating the prior revenue plan shows that the outlook was cautious, not that early customer buying has ended, and inventory rose to $227 million instead of falling toward management's $150 million year-end target.
The question now is whether hardware sales are riding temporary memory-chip price inflation and early orders or a durable corporate upgrade cycle. If higher prices and pull-ins did the work, revenue will drop once component supply normalizes; if project demand is broad, the new data center momentum will hold and inventory will clear. Fourth-quarter inventory levels and call details on unit growth will tell.
🐂 Bull Case
Data Center Hardware Reverses Its Multi-Year Slump
Connection resells computers, software and data center gear to companies and government agencies. Chief executive Timothy McGrath said that "AI is expanding the opportunities across the technology lifecycle". Until this quarter, that claim rested on laptops and desktops, while sales of servers and storage gear fell 18% from a year ago in the second quarter.
In the third quarter, corporate buyers finally spent on data center hardware. Both advanced product lines grew much faster than the 23.3% company average and took a bigger share of total net sales.
- Servers and storage sales: up 45% from a year ago, rising to 9% of net sales from 7%
- Networking gear sales: up 43% from a year ago, rising to 8% of net sales from 7%
- Software sales: up 23% from a year ago, holding at 13% of net sales
This shift matters because a business built only on personal computer upgrades is vulnerable when those upgrades finish. Data center and networking projects give the reseller a second source of growth that matches McGrath's AI remarks.
What to watch: server, storage and networking growth rates in the fourth-quarter release. Another quarter of growth above 20% would show that corporate data center upgrades are a multi-quarter cycle rather than a single large order.
Lower Overhead Lifts the Operating Margin
Over the past year Connection cut staff and offered early retirement to lower its fixed costs. Those cuts allow the company to handle more orders without adding proportional overhead. In the third quarter, selling, general and administrative expenses — staff pay and office overhead — rose 11.5% to $120.9 million, less than half the 23.3% pace of revenue.
Overhead fell to 13.8% of net sales from 15.3% a year ago, a drop of 1.5 percentage points. The New Hampshire group also recorded no severance charges for a second straight quarter. That cost discipline offset a 1.1-point drop in gross margin, lifting operating margin by 0.4 percentage points to 4.7% and raising operating profit 35.4% to $41.0 million.
What to watch: overhead as a percentage of net sales in the fourth quarter. Holding that ratio below 14% with zero severance charges would confirm that the cost savings are permanent.
Corporate Spending Carried Sales Past a Cautious Plan
Three months ago, McGrath indicated on the call that third-quarter revenue would dip from the second quarter and grow 7% to 9% from a year ago. By our math, that pointed to $759 million to $773 million of net sales. Instead, Connection delivered a record $874.3 million, up 23.3% from a year ago and up 2.4% from the second quarter.
Both corporate divisions drove the beat: Business Solutions, serving small and mid-sized firms, grew 27.8% to $328.2 million, and Enterprise Solutions, serving large corporations, rose 27.4% to $407.5 million. Public Sector Solutions grew 4.6% to $138.6 million after a year of steep declines. Beating the implied target proves the prior plan was cautious, though it does not prove that customer pull-ins have stopped.
What to watch: management's fourth-quarter revenue remarks on the conference call. The comparison is easy because sales fell 0.8% in last year's fourth quarter, so a cautious growth target would signal that customers ordered early in the third quarter.
🐻 Bear Case
Ballooning Inventory and Unpaid Bills Drain Cash
McGrath said the company delivered record sales and gross profit, "translating strong customer demand and disciplined execution into earnings growth". Yet almost none of that profit turned into cash. Operating cash flow for the first nine months of 2026 was negative $39.8 million, compared with positive $38.0 million a year earlier, because cash stayed tied up in warehouse stock and unpaid customer bills.
- Third-quarter free cash flow: $7.6 million by our math, down 88% from $62.3 million a year ago
- Inventories: $226.6 million, up $21.5 million from last quarter and up 68% from a year ago by our math
- Accounts receivable (unpaid customer bills): $789.6 million, up 28% from a year ago by our math
- Share buybacks: zero in the third quarter, and $2.5 million over nine months versus $65.5 million a year ago
Last quarter finance chief Thomas Baker expected inventory to come down toward $150 million by year-end. Instead it rose again, forcing the IT provider to leave its buyback authorization untouched for a second straight quarter.
What to watch: year-end inventory on the fourth-quarter balance sheet. Reaching Baker's $150 million target now requires a $77 million drop in three months; failing to shrink it would leave Connection exposed if hardware prices fall.
Computer Sales and Price Competition Squeeze Gross Margin
While personal computer sales fuelled Connection's revenue growth, they also hurt its profitability. Cost of sales — what the reseller pays hardware and software makers for the goods it sells — rose to 81.5% of net sales from 80.4% a year ago, pushing total gross margin down 1.1 percentage points to 18.5%. The company noted the risk of "significant price competition reducing our profit margins".
The squeeze was sharpest in Business Solutions, where gross margin fell 2.7 percentage points from a year ago to 23.8%, its fourth straight yearly decline. Combined notebook and desktop sales grew 27% to 46% of total net sales, as desktop share jumped from 11% in the second quarter to 14% and notebook share dropped from 40% to 32%.
What to watch: Business Solutions gross margin and the price-versus-unit breakdown on the call. If high memory prices rather than unit volume drove the 27% computer growth, gross profit dollars could fall quickly when component supply catches up.
Risks This Quarter Didn't Answer
Several standing risks from prior quarters cannot be tested from the earnings release alone because management gives those details only on the conference call or in the quarterly filing.
- Order backlog: never quantified in dollars, and not mentioned in the press release; the call will show whether it stayed at a record after the $874 million quarter.
- Price inflation versus unit growth: last quarter 16 percentage points of the 19.5% computer growth came from higher prices; the call and filing will show the third-quarter split.
- Early customer ordering: last quarter included mid-single-digit pull-forward demand; the call will clarify whether third-quarter sales also borrowed from future periods.
- Supplier direct sales and market share: vendor bypass remains a structural risk, and the release gives no market-growth figure to test management's standing 2-point outperformance goal.
- Related-party headquarters lease: the expired month-to-month lease with an affiliate awaits the quarterly filing's footnote for any new long-term terms.
👓 Other Themes
Memory Shortage Tops the Supply Risk List
In its forward-looking risk disclosures, Connection highlighted "supply constraints, such as the global memory (DRAM and NAND) shortage" alongside trade tariffs, government shutdowns, and Middle East conflicts. Tight memory supply has pushed up computer prices across the industry and encouraged the company to hold extra inventory, making component availability a central external factor for the fourth quarter.
💲 Other KPIs
Slowed to 14 turns a year from 15 in the second quarter and 18 a year ago. Inventory turns measure how many times a year the company sells through its average warehouse stock, so a lower number means hardware is sitting in the warehouse longer before shipping to customers.
Edged up $2.6 million from the second quarter after falling from $406.7 million at the end of 2025. The IT reseller has no debt, but the $63.4 million cash drain over the first nine months reduced interest income by 33% from a year ago to $2.5 million in the third quarter.
Down 0.2% from 25.49 million a year ago, but up slightly from 25.34 million in the second quarter. Because the group paused share buybacks in the second and third quarters to fund inventory and receivables, employee stock awards nudged the share count higher.
🔮 Guidance
Unchanged. The board declared a $0.20 per share cash dividend for the fourth quarter, payable November 27, matching the rate paid in each of the first three quarters of 2026 and up 33% from $0.15 a year ago. Connection did not provide a revenue or profit outlook in the earnings release.
❓ Key Questions
How much of the 27% computer growth was price?
In the second quarter, higher prices drove 16 points of the 19.5% laptop and desktop growth while unit volume rose only 3%. Investors need the third-quarter unit growth to see whether demand is expanding or just riding memory price inflation.
Will inventory still reach $150 million by year-end?
Finance chief Thomas Baker previously expected year-end inventory near $150 million, but warehouse stock rose another $22 million this quarter to $227 million. Cutting $77 million in one quarter is a steep target.
What is the dollar value of the order backlog?
Management has cited a record or multi-year-high backlog for four quarters without giving a dollar figure. After shipping a record $874 million in the third quarter, investors need to know whether the backlog grew or shrank.
Why did notebook share drop from 40% to 32%?
Notebooks and mobility fell from 40% of net sales in the second quarter to 32% in the third, while desktops rose from 11% to 14%. Management should clarify whether second-quarter laptop pull-ins caused that drop.